Another way to convert water into wine - trust to company rollovers

The vast majority of rollovers available under the Tax Act relate to transactions between companies.

There is however a series of transactions that effectively allows one form of structure to be converted into another.

Following last week’s post, I was reminded of one of the very few rollovers that allows the iteration from one legal structure to another. In particular, the tax rollover available for a discretionary trust that allows a trust to transfer all of its assets into a company, so long as the shares in the company are owned by that same discretionary trust. This form of rollover is available under Subdivision 122A of the 1997 Tax Act.

Obviously, there are stamp duty considerations in many states still that often need to be taken into account, however the rollover can be a very useful one in a wide range of circumstances to ensure no tax is triggered.

We have particularly seen it used proactively as part of a succession plan – it is often seen as easier to facilitate the transfer of shares in a company, as opposed to managing the control of a discretionary trust.

For those interested, our book ‘The Seven Foundations of Business Succession’ explores each of the key company and trust rollover concessions used in estate and succession planning see - http://viewlegal.com.au/product/the-seven-foundations-of-business-succession/

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Converting water into wine (or family trusts into fixed trusts)

Recent posts have considered various aspects of fixed trusts, see - Unit trusts and fixed trusts.

For a myriad of structuring issues, one issue that appears to be raised more regularly is whether it is possible to convert a family discretionary trust into a fixed trust.

This issue was considered by the Tax Office in Private Ruling Authorisation Number: 1012991136582. As usual, if you would like a copy of the ruling please let me know.

Broadly the factual matrix was as follows -

1. a 'standard' family trust held an asset; 
2. the trust had a widely crafted power of variation; 
3. the trustee resolved to make a capital distribution of the balance in the unrealised capital profits account to certain beneficiaries, with this amount left unpaid (ie meaning it was a debt owed by the trust to the beneficiaries); 
4. by agreement there was then a conversion of the debts (and some other outstanding loans) to equity such that each of the relevant beneficiaries had a certain percentage of ‘equity’ in the trust; 
5. relying on the power to vary, the trustee then amended the terms of the trust deed to convert it into a fixed unit trust. 

After analysing the provisions of its Tax Determination in relation to resettlements (namely TD2012/21, see our previous post that explores this - ATO releases draft determination on trust resettlements) the Tax Office confirms that so long as the amendments are within the powers of the trust deed, the continuity of the trust will be maintained for trust law purposes.

This is because the ultimate beneficiaries of the trust after the proposed amendments would be the individuals who were the objects of the trust before the variation. The fact that the extent of the interests of the beneficiaries in the trust change as a result of the variation was seen as irrelevant.

Therefore, the amendments to the terms of the trust did not trigger capital gains tax (CGT) event E1 or CGT event E2, being the 'resettlement' CGT events.

CGT event E1 happens if a trust is created over a CGT asset by declaration or settlement.

CGT event E2 happens if a CGT asset is transferred to an existing trust.

The Tax Office further confirmed that CGT event E5 was not triggered by the conversion of a family trust to a fixed trust.

CGT event E5 happens if a beneficiary becomes absolutely entitled to a CGT asset of a trust as against the trustee despite any legal disability of the beneficiary.

CGT event E5 does not however happen if the trust is a unit trust and thus this exemption was held to apply here.

The Tax Office also confirmed that there are no other CGT events that happened when the family trust was converted into a unit trust. This is because the amendments were within the trustee's powers contained in the trust instrument. This means that the continuity of the trust was maintained for trust law purposes.

The above post is based on an article originally published in the Weekly Tax Bulletin.

Turning comments into wine and books



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All those who interact with the post this week with any comments or likes on LinkedIn will go into the draw to win a bottle of View wine (which we are excited to confirm is now drinkable) or a paperback copy of our workbook ‘40 Forms of Trusts’.

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Fixed trusts – what exactly are they?

A recent post explored some threshold issues around the distinctions between unit trusts and fixed trusts (see - Unit trusts and fixed trusts).

Whether a unit trust is in fact a fixed trust is an area that has been the subject of significant uncertainty.

In 2016, the Tax Office did release Practice Compliance Guidelines on its view of what is a fixed trust. Unfortunately, the release by the Tax Office is problematic for at least three reasons, namely:

1. it only considered the meaning of ‘fixed trust’ for the purpose of the trust loss provisions under the Tax Act; 
2. the drafting approach of the Tax Office is non-definitive; in other words the Tax Office confirms it will retain the discretion to deem a trust not to be fixed despite what it sets out in the guidelines; 
3. furthermore, the guidelines are not themselves binding on the Tax Office. 

Subject to the above comments, broadly it seems to be accepted that the following factors will be relevant to supporting that a trust is a fixed trust: 

1.  the trustee cannot create different rights or different classes of units; 
2. all units on issue must have the same rights to receive income and capital of the trust; 
3. units must be allotted for market value; 
4. all income and capital of the trust must be distributed in proportion to the unitholdings, i.e. there is no discretion held by the trustee; 
5. partly paid units cannot be issued; 
6. the trust deed requires all unitholders to agree on the redemption of units and any redemption must be at market value; 
7. all valuations of the trust fund, and in turn the determination of unit values, must be conducted by a valuer in accordance with ‘applicable Australian accounting principles’; 
8. the trustee cannot make gifts;
9. the unanimous consent of all unitholders is required to vary the trust deed and the variation power should prohibit amendments to any of the above provisions.

The above post is based on an article originally published in the Weekly Tax Bulletin.

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Tyre pumping, timesheets and The Force

Last week’s shout out to #oldlaw (or #BigLaw as the case may be) and #burningtimesheets caused a significant amount of discussion.

Some will recall our long held view (no pun intended) that if you are not part of the solution, you are part of the problem* – particularly in relation to sustainable business models for professional service firms.

Creating a #timeless solution was a key foundation for the launch of View 3 years ago this week.

The #starwars inspired 90 second video we created to explain our vision can be viewed (again no pun intended) here – https://youtu.be/g965Sz8n9uc

Best wishes for the new financial year ahead, particularly if you have suddenly been asked to be somewhere between 5% and 23.6% (depending on your firms definition of current CPI rates**) more valuable to your customers …

* For trainspotters this is the Eldridge Cleaver (of Black Panther Party fame) quote

** For trainspotters the actual CPI in Australia over the last year is somewhere around 1%-2%